Country Report Pakistan December 2008

Outlook for 2009-10

• The terrorist attack on Mumbai, a city in India, at the end of November has led to a sharp rise in tensions between Pakistan and India, and will ensure a renewed focus on Pakistan's ability to rein in locally based terrorist groups.
• The threat of Indian aggression will mitigate inter-party political rivalry in the short term, but political stability is unlikely to improve significantly in 2009-10. Tensions between the government and the security forces could rise.
• The Mumbai attack is very likely to lead to increased scepticism among the Indian authorities towards the peace process with Pakistan. If this is taken to an extreme, it could lead to India's disengagement from the process.
• Pakistan's acceptance of a US$7.6bn emergency financing package from the IMF means that it will lose considerable autonomy in setting economic policy.
• Economic policy will remain focused on crisis management for the remainder of 2008 and into 2009. A sharp tightening of fiscal and monetary policy are the central tenets of the IMF's conditions for its assistance.
• The government's focus on reining in the fiscal deficit means that it will be forced to cut back on expenditure. Nevertheless, the Economist Intelligence Unit expects the deficit to reach 6.2% of GDP in fiscal year 2008/09 (July-June).
• We forecast that real GDP growth (expenditure measure) will slow sharply to 1.4% in 2008/09, from 6% in 2007/08. High inflation will depress real wages, and thus consumer spending. Growth will increase to 3.3% in 2009/10.

Monthly review

• On November 22nd three bombs exploded in a cultural centre in Lahore. The low-intensity blasts appear to be yet another warning by Islamist groups of their capacity to act throughout Pakistan.
• In November the president, Asif Ali Zardari, overturned Pakistans nuclear deterrence doctrine and announced a no-first-use nuclear weapons policy. He also suggested a South Asian pact to prevent the use of such weapons.
• On November 24th the IMF finalised a US$7.6bn, 23-month emergency financing programme for Pakistan. The first tranche of the funds, worth US$3.1bn, was released immediately.
• On November 12th the State Bank of Pakistan (the central bank) raised interest rates by 200 basis points, to 15%, to stabilise the Pakistani rupee and temper inflation.
• Large-scale manufacturing output declined by 6.2% year on year in the third quarter of 2008.

Source: Country Report